Congress is preparing to rewrite the Higher Education Act (HEA) for the first time since 2008. While a college degree is more valuable than ever, many students struggle to cover the cost of college, and the lowest income students continue to bear a disproportionate student debt burden. Reauthorization of the HEA presents a unique opportunity to solve widely-agreed upon problems, including a confusing array of student loan repayment options, the need for quality assurance to protect students from low-quality programs and colleges, and college affordability barriers that leave too many students with burdensome debt.

Our recent blog series, How the PROSPER Act Stacks Up for Student Debt, took a deep dive into the HEA reauthorization legislation recently passed by the House of Representative’s Committee on Education and the Workforce. Across five detailed posts, we explored how some of the bill’s major changes would impact student debt.

On whole, the PROSPER Act would do significantly more harm than good, saddling students with more debt and loosening standards in a way that would open higher education and taxpayer dollars up to an unacceptable level of risk. These changes massively overshadow the bill’s attempt to simplify programs, and improve loan counseling and data transparency.

We found that:

The ONE loan proposal would increase cost of Federal loans for most borrowers and increase risks of private loan borrowing. More here.

Changes to loan repayment would simplify the system, but at the cost of raising monthly payments for all, and increasing the risk of default and weakening a crucial safety net for the lowest income borrowers. More here.

Loan counseling and consumer information enhancements are steps in the right direction, but more complete data are needed, and consumer testing will be critical to helping students and families make the most of it. More here.

Discarding reasonable accountability standards will lead to a rise in unmanageable debt and more waste, fraud, and abuse in higher education. More here.

Narrowing of borrower defense eligibility, limiting of closed school discharge, and preemption of state consumer protections would harm student borrowers attending low-quality or even fraudulent for-profit colleges. More here.

Each of our posts last week focused on provisions in the PROSPER Act that would impact student debt and repayment, highlighting our recommended alternatives along the way (many of which already have bipartisan support). But it is also important to highlight that meaningful investments in the Pell Grant are also urgently needed to lower the burden of student debt, and such investments are noticeably absent from the PROSPER Act. Allowing the grant’s annual inflation adjustment to expire after this year, and freezing the guaranteed maximum award amount (as the PROSPER Act does) will mean that the grant’s already historically low purchasing power will continue to decline, and the already disproportionate burden of debt carried by Pell Grant recipients will continue to grow.

As the process to reauthorize the Higher Education Act moves forward and the Senate continues to shape its own proposal for how it should be improved, we hope Congress will ultimately work together to craft student-centered solutions to today’s problems of college affordability, access, and student success.

This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act, was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on the PROSPER Act’s changes to protections for students who have been mistreated by their schools or attended schools that closed.

In recent years, a surge in documented cases of deceitful and predatory practices at colleges has harmed tens of thousands of borrowers. Many are now seeking protection from the compounding damage caused by outstanding student loan debts. Rather than strengthening protections that would prevent and address this damage, however, the PROSPER Act makes it more difficult for students to be made whole after they took out student loans under deceptive or other unfair circumstances. Specifically, it narrows the borrower defense rule, makes closed-school loan discharges more difficult to obtain, and preempts states’ rights to legislate student loan protections, each of which leaves student loan borrowers more vulnerable to abuse.

The borrower defense rule authorizes the Department of Education to discharge and refund student loans used to attend colleges that broke their contractual promises or engaged in predatory practices. Under the rules finalized by the Education Department in 2016, borrowers can assert one of three categories of claims: those based on certain types of judgments against their college, a broken contract, or a “substantial misrepresentation” made by the college. The 2016 rule also protects students from predatory behavior, while deterring unscrupulous conduct by giving the Department the explicit ability to hold colleges accountable for the cost of loan relief rather than the taxpayer.

The public overwhelmingly supports providing relief to mistreated students: 78% of Americans say they support loan relief for borrowers whose schools provided deceptive information about their programs or outcomes, including 87% of Democrats and 71% of Republicans. While the PROSPER Act maintains the three categories of claims, it makes it far more difficult for wronged students to get debt relief in several ways.

First, the PROSPER Act requires borrowers to apply within three years of the time an institution engages in misconduct. But this period is unrealistically short. Many students may not even be aware of the school’s misconduct within three years, and applications supported by successful court judgements are especially unlikely to be completed within three years.

Imagine a student who finished a bachelor’s degree in four years, only to realize that the school lied to them during their recruitment, when they were unable to find a decent job in their field of study. They would have already lost the opportunity to apply for borrower defense with a three year statute of limitations. When the Education Department investigated Corinthian Colleges’ misrepresentations, it uncovered serious, widespread abuse stretching back over five years.

In 2016, based upon a survey of similar state laws, the Department of Education concluded that no statute of limitations was appropriate for cases based on certain judgments or broken contracts. Claims based upon substantial misrepresentations could be brought within six years of the date the borrower reasonably could have discovered the misrepresentation.

Second, the House proposal adds language that stipulates students must submit individual applications for borrower defense. This means that even in instances where the Department has evidence that an institution engaged in widespread misconduct that negatively affected entire cohorts of borrowers, the Department would be precluded from granting them relief as a group – needlessly adding burden and expense to this process. For example, given the overwhelming evidence of widespread malfeasance, the Department granted former students of American Career Institute in Massachusetts automatic loan discharges, without placing the burden on each borrower to apply and justify their application. Because the most socioeconomically distressed borrowers are least likely to be aware of the availability of relief and the least comfortable with navigating individual applications, it is those borrowers who stand to be most harmed by eliminating the Department’s authority to provide group discharges.

Finally, as a condition of applying for relief, the PROSPER Act requires borrowers to convert their existing student loans to the new ONE loan it creates. This requirement would force borrowers to forfeit benefits like interest-free deferment during periods of unemployment and lower monthly payments in order to pursue a borrower defense discharge.

Any steps forward in the bill regarding borrower defense are overshadowed by large, new obstacles to providing full and immediate relief where the Department has evidence to act, and creating a process that is least burdensome for mistreated borrowers, and offering a pathway for group relief.

Codifying new limits on closed school discharges will make it harder for students to get a fresh start when their schools close.

Currently, students who are enrolled in a school within 120 days of its closure may either transfer their credits to a comparable program or seek a discharge of their student loans. There are several reasons why students might prefer a discharge rather than transferring their credits. A student may have gotten halfway through their program but realized the school was providing a low-quality education by the time the school closed, and prefer to start over. Available comparable programs that will accept all of the students’ credits may have poor student outcomes, and more reputable options may only accept a small fraction of the students’ credits.

The PROSPER Act would curb the ability of students in these situations to receive discharges, by requiring students to show that they attempted, but were unable, to complete the program elsewhere – even if they had not gained necessary relevant knowledge from the time they spent in a substandard program. When Corinthian closed, many schools did in fact refuse to take students’ transfer credits because of concerns about the quality of that education.

Students who are unfortunate enough to have their schools close deserve a fresh start. Congress should retain the provision in the borrower defense rule finalized in 2016, which would provide automatic closed school discharge to students do not enroll again within three years, with no requirement to attempt to transfer credits.

Preempting states from creating improved protections against misconduct in student loan servicing and debt collection will leave borrowers vulnerable.

The Consumer Financial Protection Bureau (CFPB) has received over 60,000 complaints from borrowers about student loan servicers. These complaints describe loan servicers providing wrong and inconsistent information, losing documents, and charging borrowers random or unexpected fees. The CFPB has even found that through their own misconduct, servicers drive borrowers into default. Unfortunately, the Department of Education recently withdrew its existing policy memoranda to improve student loan servicing, adding even more confusion to loan servicer oversight while the Department undergoes an overhaul of servicing and other student aid systems in its NextGen financial services environment.

In light of lax federal standards currently in place, some states have felt compelled to put in place minimum standards for servicers, and as a result state standards can be more robust than federal protections. For example, several states, including California, Connecticut, and the District of Columbia have given their local agencies authority to assess whether student loan servicers are complying with federal laws.

Yet the PROSPER Act would gut states’ ability to protect student loan borrowers from servicer misconduct. This provision would allow the federal government to preempt state laws governing student loan servicing and debt collection and would also bar states’ ability to govern licensing of these companies. Without the ability of states to create important state-based protections, and with an unclear picture of the future of federal policy on loan servicing, this would create additional opportunities for misconduct on the part of loan servicing companies. States must be allowed to continue to protect borrowers from poor servicing and debt collection practices.

The reauthorization of the Higher Education Act could mean the difference between relief for mistreated borrowers and students attending closed schools, or an increase in the number of borrowers struggling to repay student debt. Instead of making it harder for students to get a fresh start at a high quality, affordable education, Congress should provide meaningful, student-centric pathways for debt relief.

This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act,was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on the PROSPER Act’s changes to accountability requirements for federal student aid.

The reauthorization of the Higher Education Act provides a pivotal opportunity to reaffirm and strengthen the federal government’s commitment to ensuring that students receive a quality, affordable education, and that federal dollars are wisely spent. Instead, the PROSPER Act would eliminate numerous safeguards that protect students and taxpayers from low-quality and even deceptive educational programs that waste taxpayer dollars and leave students with federal loans they cannot afford to repay.

Eliminating the gainful employment rule will reopen the door to waste, fraud, and abuse in career education programs.

The gainful employment rule is designed to ensure that career education programs in all sectors of higher education aren’t leaving students with unaffordable debts relative to their post-college earnings. In addition to protecting students from burdensome debts, the Congressional Budget Office estimates that the gainful employment rule saves $1.3 billion over 10 years because taxpayers’ resources aren’t being spent on poorly performing programs.

The PROSPER Act both eliminates the gainful employment rule and prohibits the Department of Education from writing or enforcing any future regulation with respect to the definition or application of the term “gainful employment” for any purpose under the Higher Education Act. According to 20 state attorneys general, rolling back the gainful employment rule “would open students and taxpayers up to the worst excesses of the for-profit higher education sector.” A group of Brookings Institution economists concluded that the rules “are necessary to help reduce the costs of student loans to taxpayers and to protect students from economic harm.” Eliminating the rule removes incentives for colleges to offer quality programs at reasonable costs, leaving students more likely to leave college with debts they can’t repay.

Currently, undergraduate programs providing a minimum of 15 weeks of instruction at Title IV eligible institutions are eligible for both federal student loans and Pell Grants. Programs providing at least 300 but less than 600 clock hours of instruction over the course of at least 10 weeks are eligible for federal loans, but not Pell Grants, so long as they have verified graduation and job placement rates of 70% and meet some additional requirements. The Reagan and Bush administrations tightened the current course length minimums after high-profile cases of fraud and abuse of federal aid funds, and years of high student loan default rates.

The PROSPER Act cuts the minimum length of all eligible non-competency-based education programs in half from 600 hours to 300 hours, and opens up all federal student aid funds to these programs. It furthermore removes the graduation and job placement rate requirements currently in place for programs between 300 and 600 clock hours. Some short-term programs that are closely aligned with local employment needs can offer real value to students, but eliminating existing, commonsense standards for graduation and job placement outcomes for such programs is a clear cause for concern for both students and taxpayers. Going even further by shortening existing program length requirements for federal aid eligibility without developing sufficient quality controls risks a new surge of abuse of federal aid funds. We have identified number of critical questions that must be addressed before expanding current program-level federal aid eligibility.

The PROSPER Act also expands federal grant and loan eligibility to programs primarily delivered by unproven higher education providers. These programs are not currently eligible for student aid because federal, state, and accrediting agencies have no proven mechanisms to rely on for assuring quality. Currently, schools have a 50% limit on how much they can “outsource” the provision of academic programming in a given course or program. This cap exists as an essential guardrail against the potential overuse of unproven providers of higher education that have not passed basic evaluations of academic quality.

In 2016, the Department of Education launched EQUIP, an initiative to explore any potential benefits of waiving this 50% limit and facilitating greater partnerships between colleges and non-college education providers. Recognizing the potential for associated risk to students and taxpayers, the eight pilot sites included in the initiative will be required to include new quality assurance processes. However, there are not yet any publicly available data on this initiative, including the types of programs and providers who applied or were approved for the project, let alone any identification of potential costs or benefits for students and taxpayers that may result from such partnerships.

Without even initial pilot program evidence or experience to guide policymakers, the PROSPER Act eliminates the 50% requirement for all colleges while at the same time failing to ensure any adequate oversight or accountability to ensure effectiveness. As a result, the bill would open the spigot of federal financial aid to new education companies, putting students and taxpayers at risk of wasted money and unaffordable loans.

The Department of Education currently holds schools accountable for default using the cohort default rate (CDR). The CDR measures the percentage of a college’s students entering repayment who default within three years. If a school has a CDR at or above 30% for three years, it is no longer eligible to receive Title IV funds from the government. If its CDR exceeds 40% for a single year, a school is no longer eligible for federal student loans.

The PROSPER Act replaces the CDR with a new program level repayment rate, to be calculated as the share of borrowers who took loans for each respective program and are either fully repaid, not 90 days delinquent, or in deferment after two fiscal years (the amount that a student in repayment has paid doesn’t matter). If a program’s repayment rate is less than 45% for three consecutive years, it would lose eligibility for three years. This specific calculation of the proposed repayment rate is new, which means there is no way to know how programs may fare under this standard.

Swapping out the CDR for a brand new accountability metric is not a solution to shortcomings of the CDR, which we agree can and should be addressed, and could in fact invite unintended negative consequences for students. While repayment rates hold promise for measuring a broad range of borrower outcomes, eliminating the CDR entirely moves colleges’ attention away from focusing on the most devastating borrower outcome: default. Additionally, while school-level CDRs are not immune to gaming by unscrupulous schools, program-level accountability measures are particularly ripe for manipulation because of how simple it is for schools to make slight modifications to their program offerings in order to make failing programs look like new, untested programs. For instance, the gainful employment rule (also program-based) prohibits colleges from shortening a failing Associate of Arts program to a certificate program to get continued federal aid eligibility. The PROSPER Act does not propose any such protections or prohibitions with regards to how repayment rate accountability would be implemented, opening the door to more gaming of accountability rather than less.

Eliminating distinctions between for-profit and public/nonprofit colleges could have wide-reaching effects.

With some small exceptions, the bill eliminates the distinction between for-profit and other colleges as defined by the Higher Education Act, a longstanding policy priority of the for-profit college industry. All types of colleges should be subject to appropriate oversight and accountability, but the reality is that public and nonprofit colleges are already subject to significant oversight by states, while for-profit colleges – which are almost entirely federally funded – are not. This change would make for-profit colleges eligible for a range of programs across the federal government. According to a 2007 report from the Government Accountability Office, the current definition of “Institution of higher education” – which currently excludes for-profit colleges – was cited more than 350 times across the U.S. Code at the time of the report’s publication. While the full ramifications of this change are unclear, for-profit college advocates believe that the single definition could lead to, among other things, expanded eligibility for state financial aid, and more favorable treatment of their colleges’ credits in transfer policies. According to the GAO, the change could also lead to increased political influence of for-profit colleges within states. Moreover, allowing for-profit colleges to have an even greater share of limited federal dollars would be unwise given ample research about poor outcomes at many of these schools.

Taken together, the accountability-related provisions in the PROSPER Act signal more an assault on reasonable quality assurances in higher education than an attempt to improve and strengthen existing federal efforts to hold colleges accountable. Without the protections singled out for elimination in this bill, we know that students will face higher debt loads to attend programs that are less likely to pay off. Congress must use the opportunity HEA reauthorization presents to strengthen protections for students and taxpayers, not gut them.

This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act,was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on the PROSPER Act’s changes to federal student loan counseling and consumer information.

With many students needing to borrow loans to access and complete college, it is more important than ever to provide students with relevant, clear, timely information to help them decide where to go to college and how to pay for it. The PROSPER Act advances these bipartisan priorities by taking steps to improve loan counseling, and creating a College Dashboard that provides enhanced information to better support a student’s ability to identify colleges and programs that provide the best value and fit for their education and career goals. Despite these important steps, however, the PROSPER Act fails to include other widely supported reforms that would give students the full range of information they need to understand their options for pursuing and financing a postsecondary education.

Improvements to loan counseling are meaningful, but omit critical elements.

Drawing from the bipartisan, bicameral Empowering Students Through Enhanced Financial Counseling Act, the PROSPER Act would increase the frequency of the counseling required when a student takes out a federal loan from one time only to annually, as well as ensure that the counseling is completed by the borrower before signing the loan paperwork. The annual counseling would also provide new disclosures, including individualized estimated monthly payments upon graduation. These changes hold promise for helping students understand their loan options, their estimated debt upon graduation, and how to successfully navigate repayment.

However, the PROSPER Act omits two critical elements that were included in the original bipartisan bill: a provision to explicitly recommend that borrowers exhaust their federal student loan eligibility prior to taking out private loans; and an explanation that federal student loans typically offer better terms and conditions than private loans. Chairwoman Foxx and Ed Feulner recently argued that the federal government should encourage private student loans in order to hold down college costs. However, experts in higher education finance and public policy have found no convincing, causal relationship between federal aid and college prices at public and nonprofit colleges. Meanwhile, private loans are one of the costliest and riskiest ways to pay for college, and data show that over 40 percent of private loan borrowers have federal loan eligibility left (of which they may not even be aware).

The PROSPER Act also leaves out the bipartisan bill’s requirement that loan counseling disclose the school’s cohort default rate (CDR) and instead provides prospective borrowers with a new calculation of program level repayment rate. While program repayment rates can be a helpful metric indicating a broad range of student loan outcomes, students also deserve information about the very worst borrowing outcome, default.

Consumer information enhancements are steps in the right direction, but ignore a more comprehensive solution with broad, bipartisan support.

By incorporating the bipartisan Strengthening Transparency in Higher Education Act, the PROSPER Act makes several positive steps to improve data transparency that would increase access to critical information about college costs, and student outcomes. The bill establishes a new consumer facing tool, the College Dashboard (a web-based tool similar to the current College Navigator or the College Scorecard), that will make more data available to help students decide where to attend school and how to pay for it. The new data would include the welcome addition of information on program level borrowing and earnings outcomes.

Unfortunately, the PROSPER Act ignores the need to more comprehensively address the gaps in our existing postsecondary data system. TICAS joined 21 other organizations in calling on the Education and Workforce Committee to advance the bipartisan, bicameral College Transparency Act (CTA). The CTA creates a secure, privacy-protected federal student-level data network (SLDN) that would allow all postsecondary students to be included in comprehensive enrollment and outcome measures, disaggregated by key characteristics like race/ethnicity and income. As with any data network implicating individual-level data, both security and privacy are paramount priorities that must be explicitly addressed. The CTA would secure student data through adherence to industry best practices and federal laws, and privacy would be protected by ensuring, for example, that only relevant data are collected, and that they cannot be sold or used for law enforcement purposes. The CTA has the support of over 130 organizations, demonstrating broad support among higher education advocates, educators, and employers for creating a postsecondary data system capable of fully illuminating— and empowering policymakers, schools, and states to address— current inequities in enrollment, completion, and post-graduation outcomes.

Consumer testing requirements will help make the most of new information.

In order for information to effectively influence choices, students need to understand that information, and know how to act on that information. Otherwise, we risk exacerbating existing challenges of information overload and disengagement.

Comprehensive consumer testing of information tools, including online loan counseling, is therefore critical for ensuring that the information presented successfully helps students digest and make use of information about the cost and value of a particular program and school, inclusive of personal, social and economic benefits. The PROSPER Act includes a requirement that its proposed changes to federal student loan counseling and its proposed College Dashboard be consumer tested. To ensure these tools can achieve their purpose, it is critical that this consumer testing be robust and focus specifically on how vulnerable groups of students receive and respond to the information.

The PROSPER Act makes meaningful, focused changes to provide students with timely, easy-to-understand information to help them navigate big questions about where to apply, where to enroll, what to study, and how to pay for it. The proposed improvements to consumer information unfortunately stop short of the holistic solution we need to address gaps in the existing postsecondary data system. While students today don’t make decisions in a vacuum, work remains to ensure students have access to all the information they need.

Providing students with key, clear information when they need it is a necessary component of any effort to reduce the burden of student debt, but improving consumer information alone is not sufficient. Greater investments in Pell grants and affordable student loans are also necessary to reduce financial barriers to enrollment and completion. Without a firm commitment to reducing these barriers, students with financial need may find themselves in the uncomfortable position of having gained only an increased awareness of the same limited options of where they can afford to attend and complete a program.

This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act, was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on the PROSPER Act’s changes to income-driven repayment plans for federal student loans. See our previous post for a discussion of the proposed ONE Loan program.

Income-driven repayment (IDR) plans – which allow students to repay their loans as a share of income - currently help millions of borrowers stay on top of their loans and avoid default. Reflecting broad, bipartisan agreement on the need to simplify IDR, the PROSPER Act streamlines the five existing IDR plans into one new plan. Unfortunately, thedesign of thenew IDR plan would severely undermine the program’s critical role in helping borrowers manage their debt and in reducingdefault. In addition to increasing the size of monthly payments required of borrowers enrolled in IDR and eliminating Public Service Loan Forgiveness (PSLF), the PROSPER Act includes two less-visible provisions that will increase the risk of default for low-income borrowers, and force some of them to make payments for the rest of their lives.

The PROSPER Act increases monthly payments for all borrowers in IDR and eliminates the Public Service Loan Forgiveness Program.

The required monthly payment in the PROSPER Act’s IDR plan would be calculated as 15% of “discretionary income,” a 50% increase from the 10% payment required under existing IDR plans. For example, a borrower earning $30,000 could see her payments rise by about $600 a year.

Additionally, the PROSPER Act would prevent the Department of Education from improving or creating repayment options that would be better for borrowers. The Department has used this authority to reduce student loan payments while also better targeting benefits to the borrowers who need them the most.

The PROSPER ACT would also eliminate PSLF for new borrowers, without reinvesting any of the savings into students. PSLF works in tandem with IDR but is a forgiveness (not repayment) program and has a different policy goal - to encourage students to enter public service professions, particularly those that offer lower earnings potential and require extensive education and training. Borrowers who would have utilized this program may still enroll in IDR, but will go from anticipating loan forgiveness after 10 years of payments to facing an unknowable and potentially indefinite number of years of repayment.

The PROSPER Act eliminates loan forgiveness so the lowest income borrowers would be required to make payments indefinitely.

Unlike existing IDR plans, the new single IDR plan proposed in the PROSPER Act does not guarantee that borrowers will be able to retire any remaining federal student debt after 20 or 25 years of payments. Instead, the plan would provide a cap on interest payments so that borrowers would be required to repay the equivalent of the principal and interest amount they would have paid under a standard 10-year plan (in addition to interest accrued during any deferments), no matter how long it takes them to do so.

By removing the 20- or 25-year fixed forgiveness point, the lowest income borrowers would no longer see a clear light at the end of the tunnel, and may be stuck repaying their student loans for the rest of their lives. For example, under this plan, it could take a low-income borrower with just $20,000 in student loan debt up to 92 years to repay their student loans.*

Requiring payments for longer than 20 or 25 years would have significant harmful consequences for borrowers. Research has shown that carrying outstanding student debt may affect borrowers’ ability and willingness to make other financial commitments, such as buying a home or a car, opening a small business, saving for their children’s education, or saving for their own retirement. Student debt can also negatively impact borrowers’ access to other credit. Recent reports from the Government Accountability Office and the Consumer Financial Protection Bureau both found that the number of older Americans with student debt has increased sharply, and that their loans are more likely to be in default; removing the existing cap on the number of years a borrower is in repayment would make these problems even worse.

Increasing the minimum monthly payment in IDR from zero to $25 would increase risk of default for the lowest income borrowers.

Under existing IDR plans, monthly payments for the lowest income borrowers can be as low as $0. This is a critical component of IDR that acknowledges the reality that, after paying for their basic needs, some borrowers have no remaining income to cover student loan payments. Under the PROSPER Act’s proposed IDR plan, however, borrowers would be required to make minimum payments of $25. For borrowers with tight budgets, the minimum $25 payment may force them to choose between making a student loan payment and paying for rent or food - and increase the risk that choosing to feed or house a family would result in defaulting on a student loan.

Additionally, raising the minimum IDR payment to $25 would be out of step with the definition of affordable payments established for loan rehabilitation, a process through which student loan borrowers make monthly payments to bring federal loans out of default and back into good standing. For the lowest income borrowers, the “reasonable and affordable” monthly payment for rehabilitation can be as little as $5, which can still prove difficult for them to pay. These borrowers would be at greater risk of defaulting on their loans a second time if once out of default they see their monthly payment increase from $5 in rehabilitation to a potentially unaffordable $25 in IDR.

The PROSPER Act allows for very limited circumstances under which monthly payments could be reduced to $5, but such allowances would be limited to up to three years and would require burdensome documentation. For example, borrowers who are unemployed could reduce their monthly payments to $5 for a limited time by regularly providing evidence of their eligibility for unemployment benefits, as well as a written certification that they have registered with a public or private employment agency within a 50-mile radius of their home address and that they have made at least six “diligent attempts” during the preceding six-month period to find full-time employment.

The multiple existing IDR plans should be streamlined into one plan, but the PROSPER Act’s proposal is not the way to do it. It is critical that any single IDR plan provide loan forgiveness so that borrowers will not bear the burden of federal loan debt until the end of their lives, and include $0 monthly payments for the lowest income borrowers who are living below 150% of the federal poverty level and in no position to afford federal student loan payments. Our detailed proposal for streamlining existing IDR plans includes these and other features to make IDR work better for both students and taxpayers. These features include capping monthly payments at 10% of income, exempting forgiven loan amounts from taxation, and better targeting benefits to borrowers who need help the most.

* Calculations assume that the borrower is making the minimum $25 monthly payment during the entirety of her time in IDR, and continues making payments until she has paid the equivalent of the principal and interest she would have repaid under the 10-year standard plan with a 6.8% average interest rate.

This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act,was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on certain elements of the PROSPER Act’s federal ONE Loan program, as well as the PROSPER Act’s potential impact on private loan borrowing; stay tuned for a deeper dive into its proposed changes to repayment options, as well as additional student debt-related topics.

There is widespread agreement that the current federal student loan program is too complex, resulting in a system that is difficult for students to understand and successfully navigate. The PROSPER Act rightly recognizes the need to simplify federal student loans, but the federal ONE Loan program it creates includes terms that would make federal loans costlier for students while also increasing the already high risks of private loan borrowing.

The PROSPER Act’s elimination of subsidized loans would raise borrowing costs for most borrowers.

Under current law, undergraduates currently receive subsidized loans, unsubsidized loans, or both. Subsidized student loans are allocated on a sliding scale based on financial need and carry valuable benefits: namely, no interest accrual while students are in school, for six months after they leave school, during active-duty military service, and for up to three years of unemployment or other economic hardship.

The PROSPER Act would replace existing loans with a new ONE Loan program that provides only unsubsidized loans. With three-quarters (67%) of undergraduate Stafford loan borrowers taking out both subsidized loans and unsubsidized loans, it is worth considering whether student loan subsidies could be better designed to have a greater impact on college affordability. However, the PROSPER Act simply eliminates this valuable loan subsidy for undergraduates with financial need without investing the $27 billion dollars saved back into students. This would increase the cost of student loans by thousands of dollars over their lifetimes for many of the six million undergraduates who receive those loans each year. To just disappearthis substantial investment in reducing the burden of federal loans is a major blow to student borrowers and college affordability.

TICAS has proposed streamlining the loan program into a new loan – also called a One Loan – that would carry a lower, but nonzero, interest rate for all borrowers on all of their loans while they are enrolled in school. To help students in repayment, our proposal includes interest-free deferments for Pell Grant recipients during periods of unemployment and economic hardship. Borrowers who received Pell Grants, by definition, have significant financial need, and are therefore much less likely to have family members who can support them during periods of unemployment or low earnings. Pell Grant recipients would be eligible for interest-free deferments on all their loans, rather than just their subsidized loans as is this case today, better targeting this benefit to those who need it most, when they need it.

A fixed interest rate that reflects the government’s cost of borrowing to provide predictability to students and ensure that the rates for new loans are in step with the economy.

A lower interest rate (reflecting only the government’s cost of borrowing) while borrowers are in school to increase affordability and encourage students to stay enrolled and complete, knowing that their interest rate will rise (to the government’s cost of borrowing plus a fixed margin) when they leave school.

An overall interest rate cap to ensure that interest rates on student loans will never be too high.

An interest rate guarantee to assure borrowers that their rate in repayment will never be too much higher than the rate on new student loans.

The table below summarizes selected features of federal (non consolidation) student loans for undergraduates under current law, the PROSPER Act’s ONE Loan proposal, and TICAS’ One Loan proposal.

Current Law
(New loans in 2018-19)

PROSPER Act
ONE Loan

TICAS
One Loan

Number of Loan Types

Two

One

One

Interest Benefits for Low-Income Students

Access to subsidized loans for borrowers with financial need

None

Interest-free deferments for Pell Grant recipients during periods of unemployment and economic hardship

Interest Rate

Fixed rates for new loans are set each year based on the 10-year Treasury note plus a set add-on of 2.05 percentage points, with an overall interest rate cap of 8.25%. Although rates for new loans are set each year, rates are fixed for the life of the loan.

Same as current law

Fixed rates for new loans would be set each year based on a U.S. Government-issued security (e.g., the 10-year Treasury note or 90-day Treasury bill), plus an additional fixed margin to reflect the cost of the student loan program. However, borrowers who are still in-school would have a lower interest rate that only reflects the government's cost of borrowing (i.e., that does not include the add-on).

Loan Limits

For dependent undergraduates:

$5,500 in the first year, $6,500 in the second year, and $7,500 in the third year and beyond

$31,000 total

For independent undergraduates and dependent students whose parents don't qualify for a parent loan:

$9,500 in the first year, $10,500 in the second year, and $12,500 in the third year and beyond

$57,500 total

Colleges have ability to deny or reduce loan eligibility on a case-by-case basis for individual students.

For dependent undergraduates:

$7,500 in the first year, $8,500 in the second year, and $9,500 in the third year and beyond

$39,000 total

For independent undergraduates and dependent students whose parents don't qualify for a parent loan:

$11,500 in the first year, $12,500 in the second year, and $14,500 in the third year and beyond

$60,250 total

Colleges have ability to deny or reduce loan eligibility for entire groups of students, basedon certain characteristics or programs of study. Eligibility increases would be allowed on a case-by-case basis.

Same as current law

The PROSPER Act may lead to riskier private student loan borrowing

Most students borrow their loans directly from the U.S. Department of Education, but private loan volume has been increasing over recent years, to $11.6 billion in 2016-17. Private loans are one of the most dangerous ways to finance a college education. Experts agree that federal student loans should always be the first line of defense for students who need to borrow, because they have fixed interest rates, flexible repayment plans, and other important consumer protections that are not guaranteed by private loans.

The PROSPER Act removes important protections around “preferred lender lists” of private student loan options. Colleges can choose to provide those lists to point students toward private loan options that the college considers to have competitive or favorable terms. In the mid-2000s, Congress added additional protections after some college officials were found accepting lender payments to steer students to less favorable loans.

The PROSPER Act eliminates requirements for colleges to document why specific lenders are included in these lists, disclose to students information about any referral arrangements between schools and lender (arrangements that could include agreements providing material benefits to either or both parties), and to submit annual reports to the Department of Education outlining why these lenders are “beneficial to students.” Such changes would risk the creation of preferred lender agreements that benefit the institutions financially but are not the best terms available to students.

The current statutory requirements for preferred lender lists are critical oversight and consumer protections, and should be maintained. Additionally, Congress should take steps to help students better understand the risks of private loans and encourage students to exhaust their federal loan eligibility before considering private loans.

Ultimately, student-centered simplification of federal student loans demands changes that better support enrollment and completion, rather than simply eliminate or reduce the aid available.

As Congress works to reauthorize the Higher Education Act, the choices it makes on federal student loans are more important to students and families than ever before. Each year, over seven million undergraduate students take out federal loans. For many, borrowing to go to college may be the best investment of a lifetime. But others struggle to afford monthly payments, and each year more than one million students default on their loans.

In December, the House Committee on Education and the Workforce passed, along party lines, a bill to overhaul the Higher Education Act. The PROSPER Act would make ambitious and far-reaching changes to federal student loans, perhaps more than any other single piece of legislation since federal loans were first created. Despite its recognition of the need to simplify income-driven repayment (IDR) plans and efforts to improve loan counseling, the PROSPER Act would make college debt substantially more expensive and more risky for students.

The PROSPER Act includes a host of problematic provisions that will make it both harder and costlier for students to earn a high-quality certificate or degree. It will increase the cost of borrowing for students by charging interest while students are enrolled and pushing students towards riskier private loans. While it pursues the worthy goal of streamlining income-driven repayment (IDR) plans, its approach will force all borrowers to pay more, and the lowest income borrowers to make payments for a much longer time, potentially for the rest of their lives. At the same time, the bill eliminates student protections against low-quality or even fraudulent colleges - rules designed to protect students and taxpayers from investing time and money into colleges that overcharge and under-deliver - and makes it harder for harmed students to get back on their feet. These changes to accountability only increase the risk that students will default on their loans, and increase the burden taxpayers must shoulder for underperforming schools.

Each day this week, TICAS will publish a new post as part of a series called How the PROSPER Act Stacks Up for Student Debt. Topics will include:

Each post will explore how specific major changes proposed by the PROSPER Act will affect student debt, including how much students have to borrow, how much they have to repay, and how likely it is that they end up in default. The posts will also discuss better ways – many with bipartisan support – to solve some of the problems the bill aims to address, and describe how Congress can make the most of this key opportunity to help students graduate and reach their goals without overly burdensome debt.

Unlike its House counterpart, the Senate’s 2018 budget resolution expected to pass tonight or tomorrow does not detail cuts to student loans and Pell Grants. However, it proposes overall spending levels that would require similar if not exactly the same cuts to student aid proposed in the House’s budget resolution that passed in early October. We’ve previously called attention to these proposals, including the elimination of all mandatory funding for Pell Grants. Today we focus on another of these unnecessary and harmful proposals—an arbitrary maximum income cap that would eliminate Pell Grants for students with household incomes above a fixed threshold, regardless of family size or other financial circumstances that affect their ability to pay for college. Attempting to limit Pell Grant eligibility in this way is not new, but the current political climate in which the proposal is being advanced, combined with recent external encouragement, makes resisting such efforts more urgently critical.

Arguments for a maximum income cap rely on the unsupported assertion that an increasing share of Pell Grants are going to “middle income” students who don’t have nearly as much financial need as the lowest income students. However, data clearly show that the vast majority of all Pell Grant recipients continue to have family incomes of $40,000 or less, and furthermore that the median family income of Pell Grant recipients (in 2011-12, $26,100 for dependents and $12,700 for independents) has been declining over time.

Additionally, the federal aid eligibility formula rightly recognizes that while income is a central component of a family’s ability to contribute toward the cost of college, income alone is an insufficient determinant of financial need. In addition to income information, the federal financial aid formula also takes into account factors including assets, taxes paid, household size, and the number of family members in college at the same time—factors that directly affect a family’s ability to afford college for each student. For example, of the Pell Grant recipients with family incomes above $40,000, more than two-thirds have families of four or larger, and almost two in five have families of five or larger.* Of the just 10% of Pell Grant recipients with family incomes over $50,000, almost four in five (79%) come from families of four or more, and many have more than one family member in college. While an income of $50,000 may be near the median US income, larger families must use that “middle” income to cover basic needs for more family members, and potentially to cover college costs for more than one family member at the same time.

Establishing an arbitrary maximum income cap would undermine college access and completion goals by forcing students with very high financial need to make up for lost grant aid by working longer hours, taking out more loans, or forgoing college altogether. Pell Grant recipients already face disproportionate debt burdens in attending and completing college: Nearly nine in 10 Pell Grant recipients who graduate from four-year colleges have student loans, and their average debt is $4,750 more than students who did not receive a Pell Grant.

Now is the time to protect and strengthen the Pell Grant for all students with significant financial need, not arbitrarily restrict access to those grants.

"Today, Representatives Susan Davis (D-CA) and Bobby C. Scott (D-VA), and Senators Mazie Hirono (D-HI) and Patty Murray (D-WA), introduced the Pell Grant Preservation and Expansion Act. The bill would increase college affordability and access by securing, improving and expanding the Pell Grant, which is the federal government’s most effective investment in higher education. Congress just cut $1.3B from Pell Grants for FY2017, and the President and House Republicans are proposing to cut billions more in FY2018. In stark contrast, these legislators are providing the leadership we need for students and families struggling to pay for college.

"Each year, more than 7.5 million students rely on Pell Grants to afford college. Yet, the current maximum grant covers the lowest share of public college costs in over 40 years, and will lose its annual inflation adjustment after this year. Boosting the purchasing power of the grant and permanently indexing it to inflation to prevent additional erosion of its value are investments we know are critical to increasing college access and success. The bill includes these and other important improvements that TICAS has called for, including extending the lifetime eligibility limit for Pell Grants, resetting eligibility for students defrauded by their schools, and making Pell Grants a mandatory program to guarantee sufficient annual funding and eliminate any uncertainty for students.

"We thank Representatives Davis and Scott, and Senators Hirono and Murray for their longstanding and continued leadership on college affordability, and Pell Grants specifically. Pell Grant recipients are already more than twice as likely to borrow to attend and complete college, and leave school with significantly more debt than their higher income peers. As college costs and student debt continue to rise, we urge Congress and the Administration to work together on making the Pell Grant program, the cornerstone of federal financial aid, work even better for America’s students and the American economy rather than debating how to cut it."

This House plan to eliminate mandatory Pell funding would have profoundly harmful effects for students and put college further out of reach for millions of Americans. Mandatory funding currently pays for $1,060 of the current maximum Pell Grant (almost one fifth of the $5,920 grant in school year 2017-18), which already covers the lowest share of the cost of attending college in over 40 years.

The $7.2 billion in mandatory Pell Grant funding in FY 2018 alone is the equivalent of the average Pell Grant awards for 2.0 million students—one in four students receiving Pell Grants. This is more than all the Pell Grant recipients attending college in Texas, Florida, Illinois, Wisconsin, and Ohio combined (1.9 million students).

Prior harmful cuts to Pell Grants, combined with an improving economy, have reduced program costs and created temporary reserve Pell Grant funding. Student advocates and more than 100 members of Congress have called for using this reserve to restore some of the lost purchasing power of Pell Grants and to reinstate access to grants year round. Rather than invest these reserve funds in Pell Grants for students, the president’s budget simply cuts $3.9 billion in FY 2018. The House plan that would restore grants year round while cutting $77 billion over 10 years means Congress will almost certainly drain the reserve funds, briefly hiding the full magnitude and consequences of eliminating mandatory Pell Grant funding.

The House proposal to eliminate all mandatory funding would cut Pell Grant funding by $7.2 billion in FY 2018 alone. Even if Congress used all the Pell Grant reserve funds to replace the Pell mandatory funding in FY 2018, it would lead to a $2.7 billion Pell Grant funding gap the next year (FY 2019). To close this gap, Congress would have to eliminate grants entirely for more than 700,000 students or cut all students’ grants by an average of almost $350, or both eliminate and cut grants. The funding gap would increase each year, requiring even more severe Pell Grant cuts going forward.

It is unconscionable to create a Pell Grant funding crisis by eliminating all mandatory funding and try to mask it using the program’s temporary reserve. Rather than making deep cuts to Pell Grants, Congress should instead invest existing Pell Grant funding in helping students whose urgent needs include restored access to grants year round, an increase in the maximum award, and an extension of the grant’s inflation adjustments that expire after this year (FY 2017).